Maastricht University

Wal-Mart′s European Business Strategy

by

 Tomislaw Dalic

1. Introduction 3

2.1 Wal-Mart History and Success Formula 4
2.2 Strategic Fit 6
2.3 Competition in Europe 7

2.3.1 Carrefour 7
2.3.2 Metro AG 8
2.3.3 Aldi 11
2.3.4 Ahold 11

2.4 Industry analysis using Porters five forces model 12

2.4.1 Internal Rivalry in European Retailing Industry 12
2.4.2 Barriers to entry 13
2.4.3 Supplier Power 14
2.4.4 Threat of Substitutes 15
2.4.5 Buyer Power 15

2.5 Conclusion 16
2.6 References 17
2.7 Bibliography 19

2.8 Appendix 1 -Learning reports 20

1. Introduction

How many retailers would one expect to be in the top ten of the global fortune 500? There is one, and it has a firm second position, leaving behind mammoth companies such as Ford and General Motors (www.fortune500.com). Wal-Mart is the world′s largest retailer with 195 billion dollars in revenue in the year 2000, with operations mainly concentrated in the United States. Renowned in the United States for their discount centres, they have diversified into wholesaling to sustain the explosive growth of the seventies and eighties. Making use of acquired knowledge in distribution and inventory management technology, these new formulas proved to be profitable as well. However, the United States of America were not big enough to satisfy the needs of such a giant company, and international expansion was inevitable. After entry in South-America and Asia, Europe is the next market to be penetrated by Wal-Mart. The time seems right, as extensive liberalization has opened up the European Union and far-reaching economic integration between member states have created a huge common market, offering scale economies in purchasing and distribution similar to U.S. operations. Wal-Mart can use experience from previous foreign expansions to implement the correct strategy for Europe. This paper analyses Wal-Mart′s European strategy, the rational behind its move to Europe and implications for its European competitors. It explains the following problem statement:

Wal-Mart′s entry into the European market was a strategic move rather than the pursuit of a growth opportunity.

A brief review of Wal-Mart′s history will be followed by the factors explaining their success in the United States, coming together in a concept called "strategic fit". After a short summary of their foreign expansion into South-America to stress the importance of the transferability of the concept of strategic fit, a description of the European retail industry will be given. Then the European retail industry is analysed with the help of the generic five forces model from Porter. The paper ends with a conclusion hinting at the future of the European retail market.

2.1 Wal-Mart History and Success Formula

On the heels of supermarkets, discount stores emerged in the 1950s in the U.S. Sam Walton recognized the opportunity of locating discount retail stores in relatively rural cities and opened his first Wal-Mart store in 1962 in the town of Rogers, Arkansas. From the beginning Wal-Mart stores have been offering low prices combined with a wide selection of merchandise and individual, friendly service (www.american.edu, May 16, 2001). Supermarkets had educated consumers about self-service and many were ready to try cheaper self-service retailers. Total discount retail sales grew at a compound annual rate of 25 percent from $2 billion in 1960 to $19 billion in 1970. An illustration of Wal-Mart’s success is the fact that not one single competitor from the early years existed as of 1993. King’s Corvette, Mammoth Mart, and Zavre failed over Wal-Mart. According to Ghemawat (1999), Wal- Mart’s success was founded on three main pillars.

First, by locating many of its stores in relatively rural cities, Wal-Mart provided a much-needed service to customers who lived in or near these cities (Barney, 1997). Sam Walton said: “our key strategy was to put good sized stores into little one-horse towns everybody else was ignoring. If we offer prices as good or better in cities that were four hours away by car, people would shop at home.” (Ghemawat, 1999) These one-horse towns, inhabiting between 5,000 and 25,000 inhabitants, were only large enough to support one large discount retail operation and therefore able to charge prices that were up to six percent higher than Wal-Mart prices in more rural areas. (Barney, 1997)

The second pillar has been Wal-Mart’s focus on technological innovation. Throughout the company’s history, Wal-Mart has been the first to introduce new systems improving inventory management, leading to cost reductions and the ability to undercut competitor prices (Michael Lawless, 2001). One can think of systems such as point-of-sale Uniform Product Codes (UPC) scanning, registering product sales and immediately replenishing them through an automated ordering system, intra-store radio frequency (RF) transmission of product UPC and pricing information between central store inventory systems and personnel with scanners on the store shelves. Their mo st valuable infrastructure investments were made at a higher level. A satellite system connecting all stores was initially installed in 1983, and grew into a complex communication network that included all stores, headquarters, and distribution centers, as well suppliers. This system has enabled a just-in-time process of inventory management thought to be impossible in general merchandise retailing, allowing rapid responses to inventory needs and reduces the amount of safety stock needed.

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